Why clean-tech stocks are outperforming

People may think that John D. Rockefeller became the richest man in the world by investing in oil. But he wasn’t just investing in oil, he was investing in the future. At the time, the world was running out of whale oil and Rockefeller saw that the future was in the new oil.

The president of the Rockefeller Brothers Fund, Stephen Heintz, told the story at the DivestInvest Conference in Sydney recently and said he was convinced that if Rockefeller were alive today, “he would be doing the same thing in the clean-energy economy because he knows that’s the future”.

If investing in the future was easy, we wouldn’t have sayings like “Prediction is very difficult, especially if it’s about the future.” But the trends back Heintz’s view that the future belongs to clean energy.

There is a long way to go to recapture the strong optimism in clean technology that was around in early 2007. But the ACT Cleantech Index is up 11.6 per cent over the past six months and 36 per cent over the past three years. The number of clean technology and clean energy stocks on ASX is again rising, and there are plenty of good ones for investors to research.

Key trends for clean tech

The big news was the UN Climate Change Conference in Paris in December 2015, when 196 countries agreed to limit their greenhouse gas emissions to keep the global temperature rise to below 2 degrees celsius and to aim for 1.5 degrees. These included the world’s biggest emitters: China, USA, EU and India. In April, 175 countries signed the agreement, with more to come.

Having so many countries on board, and for the first time the big emitters, is a new level of international co-operation on climate change. This should give investors a new level of confidence in the direction the world is heading.

The agreement means big money will continue to flow into climate change solutions. The previous goal had been for developed countries to invest $US100 billion a year by 2020 to help poor and vulnerable countries. The Paris agreement extends this to a $US100 billion minimum annual target from then to 2025.

That will add to the second trend: rising investment in clean energy. Investment in renewable energies has been strong for many years and is getting stronger. The International Renewable Energy Agency (IRENA) reported that in 2015 a record $US286 billion was invested in renewables and the world’s renewable power generation capacity grew by 8.3 per cent, the highest rate on record.

Solar energy capacity grew by 26 per cent, a record, and wind power capacity grew by 17 per cent, also a record. Bioenergy and geothermal energy capacity each increased by 5 per cent each and hydro power capacity by 3 per cent.

The growth was helped by another trend, the continuing fall in the cost of the technologies. IRENA said that since 2010, prices for solar photovoltaic modules have fallen up to 80 per cent and prices for onshore wind turbines by up to 45 per cent.

The fast growth is not just happening in the developed world. Renewable generation capacity grew 14.5 per cent in Central America, 12.4 per cent in Asia (which has the biggest installed capacity), 7.8 per cent in the Middle East, 6.3 per cent each in Africa and North America, 5.3 per cent in South America, and 5.2 per cent in Europe. The whole world is doing it. Even conservatively governed Australia clocked up 8.1 per cent, mostly solar and some wind.

Pressure builds on fossil fuels

That brings us to the next set of trends: while renewable energy is on the way up, fossil fuels are on the way down. Global oversupply of oil and gas has led to low oil, gas and coal prices. Over the past five years the oil price has fallen 65 per cent, the gas price has fallen 56 per cent and the coal price by 47 per cent.

The headlines show many companies in these sectors are losing money or going out of business. These include some of the biggest, such as the world’s biggest private coal miner, Peabody Energy, which in April entered Chapter 11 bankruptcy. International Banker reported that nearly 50 US coal companies have filed for bankruptcy since 2012. The Wall Street Journal reported that since mid-2014 about 60 North American oil and gas companies have filed for bankruptcy. That pain is global.

And fossil fuel investors are hurting. Over the past five years the Dow Jones US Coal Index is down 93 per cent, the Dow Jones US Oil & Gas Index is down 19 per cent, and the Dow Jones Global Oil & Gas Index is down 35 per cent.

There is another trend working against the fossil fuel companies. The movement that encourages investors to divest their holdings in fossil fuel stocks is continuing to grow around the world. It started in 2012 and late last year DivestInvest.org reported that more than 500 institutional and other investors with more than $US3.4 trillion in assets under management, had committed to divest their portfolios of fossil fuel stocks.

Many of these investors are very high profile and close to home. The Rockefeller Brothers Fund joined in 2014. In 2015, Norway’s massive sovereign wealth fund, one of the world’s biggest and built on oil revenue, began to divest holdings in companies where coal is more than 30 per cent of their mining activities. At around $US9 billion, it is said to be the biggest divestment from the coal industry in history.

And while it is not part of the divest movement, last month Saudi Arabia, the world’s biggest oil producer, said it plans to sell oil assets to create up to a $US2 trillion fund to diversify the country’s economy away from oil.

The point for renewable energy investors is how much of the money freed by divestment will go into renewables. This is a live question at present for institutional investors. Do they just spread it among the rest of the portfolio or do they allocate it to clean and other energies? As each institution makes its decision, it is likely that some of this considerable capital will go to renewables.

One final international trend is the unlikely rise of uranium as the main alternative carbon-free energy. A few years ago uranium was on the starting line and had much support, but the magnitude of Japan’s Fukushima nuclear reactor disaster and the decision by Germany to phase out nuclear energy by 2022, mean the industry’s prospects are mixed.

While some in the industry are positive, this is not reflected in the uranium price. Data from Ux Consulting shows the spot price for uranium is around its 10-year lows.

The trends in Australia have been positive for renewables. The Turnbull Government has lifted industry and investor confidence. So too has the Paris agreement, the looming shortage of large-scale generation certificates, the rise of rooftop solar, growing choices in electric cars and energy storage, and the continued support for renewables by the public.

About the author

Victor Bivell, a magazine editor for 29 years, is the founder and publisher of Eco Investor.

This article appeared in the May 2016 ASX Investor Update
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This article appeared in the May 2016 ASX Investor Update email newsletter. To subscribe to this newsletter please register with MyASX.

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